The business section of The New York Times this week ran an important item entitled, "Mortgage Crisis Spreads Past Subprime Loans."

The article goes on to explain how, as home prices fall and banks tighten lending standards, people with prime credit are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace.

The Times article goes on to explain how the rise in so-called "prime" delinquencies, while less severe than the one in the subprime market, nonetheless poses a threat to the battered housing market and a weakening economy, which some specialists, the Times reports, say is in recession or heading for one.

As a striking example of the extent of the problem extending beyond subprime, the article quotes an example of a Don Doyle, a 52-year old computer engineer at Lockheed Martin, with a "stellar" credit score — and a mortgage of more than $740,000.

The people most aware of this worsening situation are probably those institutions that have either lent against U.S. mortgages or have loaded up on "securitized" mortgage derivatives, such as collateralized debt obligations (CDOs).

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Such names as Countrywide, Citigroup, Bank of America, JPMorgan, Washington Mutual and Wells Fargo spring immediately to mind. Together, this "group of six" apparently accounts for half of our national mortgage market.

In the Washington Post appeared an article entitled "New Mortgage Rescue Goes Beyond Subprime."

This article says that, against a backdrop of surging defaults and administration officials prodding the mortgage industry, the Project Lifeline plan will allow seriously overdue home owners to suspend foreclosures for 30 days while lenders try to work out more affordable loan terms.

As our readers will know, we have long warned of this problem and continued to point to its macroeconomic effect while Wall Street cheerleaders dismissed the issue, pointing to a supposedly "inconsequential" proportion of the real estate market represented by subprime.

As the situation has worsened, observers like me have wondered who would blink first. Would it be borrowers, the bankers or the government?

Well, the size of the problem is now so large that there is the real prospect of massive foreclosures combined with the virtual evaporation of the home financing market.

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As a result, mortgage lenders face an unusual situation — the massive cost of an overwhelming number of foreclosures and the equally overwhelming cost of holding foreclosed houses for a considerable period of time! By and large, banks are in the lending business, not the ownership and management of a massive portfolio of residential property.

Furthermore, the banks do not want to face the hidden costs of long-term property vacancy, which include protection from vandals and the costs of maintenance or potential liens posted by local authorities when basic maintenance codes are breeched.

Now, with borrowers sensing the power of numbers and facing negative equity as their house prices have fallen, some borrowers are merely walking away, even from the low "teaser" interest rates.

This creates an additional problem — a potential "borrowers strike."

This is a virus which could spread rapidly if borrowers get a sense that things are becoming a free-for-all.

I have pointed before in this column the business school case study entitled "J.I. Case." In this situation the bankers suddenly realized that their loans to the company were so large that they were in effect banking with Case — not the other way around — and were thereby forced to renegotiate terms.

The mortgage situation has now escalated, thanks to the distorting noise made by the Wall Street cheerleaders to a position similar to that facing the bankers to J.I. Case. Only this time, the problem is so massive that now a very serious political problem also looms.

So, the bankers have now blinked. They are being goaded to act by a very worried government.

It appears to me that the government feels the real estate situation is now so threatening to our economy that something must be done by the lenders. Even if it involves allowing the fundamental law of contract to be turned aside.

Furthermore, it appears to me that, should Project Lifeline prove ineffective, the government will then call upon the American taxpayer to bail out irresponsible borrowers and lenders who speculated wildly on rising property values.

And all this is from a so-called Republican government. Heaven knows what a Democrat government might do!

This may utterly dismay some Republican readers, who may wonder just how the Republicans (the party of strong defense and sound finance) got us into such a mess.

In this respect, I was talking recently to an old friend and my former NATO military commander General Al Haig. His view is that the basic problem is, to quote him, that "the Republican Party has been run by non-Republicans for far too long!"

Aside from that interesting statement, I feel that the main danger of the new, "save the banks and the government" strategy of abrogating the law of contract, is that it could encourage a general attitude of rampant, self-serving default when a gamble fails to pay off.

Walking away from debts could soon become a national pastime and be termed with some politically correct catch-phrase such as "financially challenged," designed to encourage mass taxpayer sympathy.

But then what of our economy?

As I have said before, recessions act as a natural and healthy counter-balance of the risk taking that is essential to the very fabric of our great wealth-creating free enterprise system.

In the recent past we have witnessed an unprecedented and massive boom in asset prices. According to The Economist, the aggregate value of residential housing in just the developed world rose by a staggering $25 trillion between 2001 and 2006!

This massive boom was financed largely by a grotesquely excessive level of debt, encouraged by former Fed Chairman Alan "It wasn't me" Greenspan.

It is this unprecedented accumulation of debt that has to be "wrung out" of our economy, before we can once more grow in an economically healthy manner.

The problem is that it now appears that our politicians, who increasingly buy our votes, are unwilling to allow economic reality to be restored.

What I find most concerning is that our government may well borrow even more money (thus loading the obligations upon the backs of future generations) to bail out the gamblers and that this, in turn, will encourage an explosive trend toward default as "normal."

Our economy depends intrinsically upon the rule of law, including the legal protection of intellectual property and contract rights. If the rule of law were to fall become "fashion" of irresponsible default, our future economy viability would be threatened.

Our government is in a most difficult and unenviable position. But one has to admit that it is largely of its own making. In order to thwart corrective mini recessions, in the past, our government has abused the Fed by getting it to fuel (outside its legitimate role) a series of booms.

Now, when the reality of a major correction looms, the government wants the "good life" to continue unhindered, even if it means disregarding the basic law of contract.

The price of this political unwillingness to face reality is that if and when it does come, a recession will be both longer and deeper than would otherwise have been the case — and that will bad for all of us.

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